This article explores how the possibility of collusion affects relational contracts. Responsibility for a contract is delegated to a supervisor who cares about both production and kickbacks paid by the agents, neither of which are contractible. We characterize the optimal supervisor-agent relational contract and show that the relationship between joint surplus and production is nonmonotonic. Delegation may benefit the principal when relational contracting is difficult by easing the time inconsistency problem of paying incentive payments. For the principal, the optimal supervisor has incentives that are partially, but not completely, aligned with her own.

The role of wasteful procedures in organizations(joint with Takakazu Honryo)

We study investment decisions in organizations with diverging preferences. A prime example of this would be corruption, in which case part of the organization would be able to funnel investment funds to private accounts. Another, slightly more general interpretation of the model, is that the whole organization might agree on what constitutes a good investment, but different parts of the organization might have different perceptions of the actual costs. We show how in a principal-agent framework with partially aligned preferences, the principal can benefit from requiring wasteful and costly procedures into the decision-making process.

We study the reputational implications of dismissals in an infinite horizon stylized model of bureaucratic or political corruption. In each period a principal faces two overlapping generations of officials and sets their latitude. If at the end of his first term, an official is found to have been corrupted, he is dismissed, otherwise he is reappointed for a second and final term. A unique steady state exists and equilibrium sequences are globally stable and unique. Our main contribution is that transitional dynamics are asymmetric. If corruption is above the steady state, it converges monotonically to it; if corruption is below the steady state, it first jumps above the steady state and then converges monotonically to it. We use these findings to study the dynamic response of corruption to changes in the returns from corruption and to investigate the dynamic trade-offs of corruption deterrence.